On January 10, 2025, the Securities Exchange Board of India (“SEBI”), issued a consultation paper on the proposal to increase the size criteria, set to guard against potential circumvention of Press Note 3 (“PN 3”) stipulations, in the additional disclosure framework (“Consultation Paper”)[1]. The Consultation Paper invites public comments and suggestions, to be submitted at the latest by January 31, 2025.
Under the additional disclosure framework for FPIs specified in a circular dated August 24, 2023, (“Circular”) Foreign Portfolio Investor(s) (“FPIs”)/ investor groups with equity Assets Under Management (“AUM”) exceeding INR 25,000 crores (Indian Rupees Twenty-Five Thousand Crores only) are required to provide detailed information on all their investors/ stakeholders on a look-through basis with a view to guard against potential circumvention of PN 3 stipulations. Due to the increase in market volumes, it is proposed to raise this threshold to be increased from INR 25,000 crores (Indian Rupees Twenty-Five Thousand Crores only) to INR 50,000 crores (Indian Rupees Fifty Thousand Crores only). The key features of the Consultation Paper include:
I. Extant Framework:
To prevent potential circumvention of Minimum Public Shareholding (“MPS”) norms, SEBI (Substantial Acquisition of Shares and Takeover) Regulations, 2011 (“SAST Regulations”), and PN 3, the SEBI (Foreign Portfolio Investors) Regulations, 2019 (“FPI Regulations”) were amended in August 2023, and Regulations 22(6) and 22(7) were inserted in the FPI Regulations.
Furthermore, the Circular mandated FPIs to disclose detailed information of all entities holding any ownership, economic interest, or control in an FPI, on a full look-through basis, without any threshold, for FPIs fulfilling any of the following criteria:
(a) Holding more than 50% (fifty percent) of their Indian equity AUM in a single Indian corporate group against possible circumvention of MPS/ SAST Regulations (“Concentration Criteria”).
(b) Individually or along with their investor group, holding more than INR 25,000 crores (Indian Rupees Twenty-Five Thousand Crores only) of equity AUM in the Indian markets (“Size Criteria”).
To address regulatory arbitrage related to Offshore Derivative Instruments (ODIs) and FPIs with segregated portfolios, the additional disclosure framework shall also be made applicable directly to ODI subscribers and segregated portfolio(s) of FPIs with sub-funds or separate classes of shares, as per SEBI’s Circular dated December 17, 2024. Consequently, for computing breaches of size criteria, combined equity holdings/ positions taken through FPI and ODI routes shall be considered.
Certain FPIs, including those with a broad-based, pooled structure with a widespread investor base or those with ownership interests by Government or Government-related investors, have been exempted from additional disclosure requirements, subject to specific conditions. Furthermore, the detailed mechanism for independently validating FPIs’ conformance with these conditions and exemptions was outlined in the Standard Operating Procedure (SOP) developed by the Custodians and DDPs Standard Setting Forum (CDSSF), in consultation with SEBI.
II. Need for Review:
In a consultation paper dated May 31, 2023, SEBI sought public comments on the proposal for an additional disclosure framework with a threshold for size criteria at INR 25,000 crores (Indian Rupees Twenty-Five Thousand Crores only), which was finally adopted in the final framework issued through the Circular.
The size criteria were specified with an aim to prevent the circumvention of PN 3 stipulations by FPIs with large Indian equity portfolios that could potentially disrupt the orderly functioning of Indian securities markets. The ‘potential to disrupt’ must be evaluated relative to market size, using parameters like turnover. Data shows that the average daily turnover in the capital market segment at National Stock Exchange increased by 122% (One Hundred and Twenty Two Percent) between FY 2022-23 and FY 2024-25 (till December 2024).
III. Proposal:
Considering the increase in market turnover, it is proposed to increase the Size Criteria from INR 25,000 crores (Indian Rupees Twenty-Five Thousand Crores only) to INR 50,000 crores (Indian Rupees Fifty Thousand Crores only). Additionally, it is clarified that, through this Consultation Paper, no changes are being proposed to the extant threshold or treatment for the Concentration Criteria, which aims to prevent circumvention of MPS and SAST Regulations.
[1]https://www.sebi.gov.in/reports-and-statistics/reports/jan-2025/consultation-paper-on-proposal-to-increase-the-size-criteria-set-to-guard-against-potential-circumvention-of-press-note-3-stipulations-in-the-additional-disclosure-framework_90696.html